What exactly is a short sale?

No doubt many buyers have heard the term “short sale” in the last few years. Most of them know that it has something to do with the owners not being able to pay their mortgage, the bank getting involved, the price of the home being low and not much else. Some buyers simply stay away from short sales (hey, most Realtors hate them as well!), mostly because they have no idea what that means to them and how a short sale is different from a regular sale or a foreclosure. So a brief explanation is definitely in order.

After the crazy housing market we’ve just experienced, it’s possible that a homeowner may owe the mortgage company more than his home is worth. For example, if someone purchased a house for $400,000 and took out a mortgage of $380,000, it may be that the home is now valued well below the amount still left on the loan. This is called “being underwater,” as the homeowner owes the bank more than his house is worth.

Many homeowners who bought property seven or eight years ago are in this situation, and most of them are just paying their mortgage, hoping that the value of their investment will go up soon. But what if an owner has to move now or lost his job and is unable to pay the mortgage? He has three choices: sell the house and come up with the difference from savings, stop paying the mortgage and have the bank foreclose on the home, or negotiate with the bank to accept less money from a sale than he owes.

This last option, if approved by the bank, is called a short sale. The bank would rather accept less money than go through the expense and effort of a foreclosure. Basically it agrees to cut its losses and take whatever it can get in a sale.

Because the bank agrees to take a loss, it is in a position to make some of the decisions usually made by the owner in a normal transaction. It sets the listing price of the home based on what it is willing to accept, and very often will not negotiate that amount. Although the home is still owned by the seller, the bank has final approval of which offer to accept and on what terms.

A short sale is almost always listed below the comparable value of surrounding homes, but this “good deal” must be taken in context of other expenses a buyer will have. The seller, who needs every penny to pay his bank, will not pay for any township inspections, will not bring the home to code if required by the township and will not repair any defects identified by the home inspector. Often the seller is behind on homeowners’ association fees, and will not pay those off as well. All these expenses must be paid by the buyer before or at the closing.

Also, because of the large number of short sales handled by any given bank, the approval process takes time at every step of the transaction. It is not uncommon for the buyer or his agent, attorney or inspector to ask the bank a question and not get a reply for days, if not weeks. The irony is that a “short” sale in fact may take a very long time to close.

If you are considering making an offer on a short sale, ask yourself these questions: Are you willing to wait several months for the transaction to close? Are you prepared to buy the home in “as-is” condition and do whatever it takes to make it livable? Are you ready to spend your own money on inspection items and repairs needed before the home is even yours?

Short sales can be a good investment, but they are not for everyone. Speak with an attorney about the details and pitfalls of a short sale transaction. I will do everything I can to explain the process from a real estate perspective and guide you in your decision. But if you are willing to take on the challenge, a short sale can turn out to be a very good deal.

Do you need more information about short sales? Contact me to discuss your options as a seller or a buyer.